Question

Why is the level of investment spending inversely related to the level of the interest rate?

Can you think of any consumer spending components that may also depend on the interest rate? Explain your answer

Answer 1

Investment spending is inversely related to the interest rate as a higher interest rate increases the costs of borrowing and lowers the net returns from investment. So, the higher the interest rate, the lower is the investment spending.

I think consumer spending on durable goods also depends on the interest rate. Generally, durable goods are funded through borrowing and higher interest rate makes them costlier. So, higher interest rate reduces consumption spending on durable goods.